CenterPoint Energy Q1 2024 Earnings Call Transcript

Thanks Constantine. Good morning.

Yeah. Thanks Constantine. Pretty comprehensive question there. Let me kind of start at the highest level and I think there's three main points to this capex update. The first is we've got a great base plan, 10% rate, base growth through the end of the decade. The second point I'd make is we've been spending significantly on resiliency because it's the right thing to do for our customers and case in point, we've increased our capex plans over 10% since our 2021 Analyst Day. That was largely to support increased resiliency efforts and so this is again spend that has been already incorporated in this plan and then importantly, I do think third, we have a significant amount of opportunities in front of us. Those take the form of continued resiliency investment, particularly on the distribution side.

One of the things that I'm probably most excited about is the industrial electrification opportunity that we have here, particularly in the Greater Houston area. Just as one quick example, there's about 10 gigawatts of hydrogen production in development to come online before 2030 that hydrogen production requires significant increases in electric transmission capacity, substation capacity -- also carries with it significant jobs which will help continue to drive residential load growth and on the gas side of things, we continue to see significant opportunities for incremental capex, particularly around maybe local gas transmission pipeline capacity in the Greater Houston area. We're one of the few gas LDC's in the country that don't have localized gas transmission capacity and I think it can help our customers help mitigate their cost in severe weather events. And so, the short of it is we've got a great base plan, we've been spending on resiliency, and we have significant increases in capex still in front of us.

In terms of being accretive to the plan, we wouldn't spend it if it wasn't the right thing to do for customers, if it wasn't the right thing to do for shareholders for all of our stakeholders. I think we've developed a track record of executing upon that. In terms of financing maybe I'll turn it over to Chris to share some thoughts about funding any incremental capex from this point forward.

Sure Happy to hit it and morning Constantine. I think if you look at the larger incremental potential capex that Jason was just referencing, you should think about it as just the prior approach that we've referenced, which is continuing to incorporate that into our capital plan as we can execute it, finance it and recover it and the way in which we would do it would largely be to fund it in line with our enterprise cap structure. As you look specifically at the roughly $500 million opportunity we referenced this morning around the resiliency filing, we did reference that we're going to go after some potential both federal and state based loan and cost matching programs but to the extent that we're not successful on those, again, the simple way to think about it is we'd be funding in line with the enterprise capital structure.

Sure. Happy to touch on it. And I have to say, we're pleased with where we are today. You saw us report at 14.6% in terms of FFO to debt based on the Moody's calc and consistently are seeing as we go forward, a good trajectory both on the Moody's and S&P calculation. As we think about the different financing alternatives, it is certainly the case that we are already pursuing some DoE loan program dollars to the tune of just over $2 billion already. So those have already been filed. Really, that's just a cheaper alternative for better financing costs for customers.

As we look at the financing plan throughout the year, certainly we've got a few maturities here that are coming up. We've hedged against a portion of the current offering that's probably closer here in front of us at the parent level. And then as you look at hybrid alternatives I think you referenced there, that's certainly something that we're evaluating. You should assume, we kind of like the profile there, but we are looking really at a couple of alternatives, both for some tax alternatives this year and some hybrid opportunities, if they make sense. And it's just my way of saying, Constantine, that we're always going to be pursuing the most efficient financing we can as we go forward.

Yeah Constantine, I think it's a great question. Probably less kind of an issue directly in the service territories that we serve, largely because the growth that we're seeing, both the potential for it up in Southwest Indiana as well as here in the Greater Houston area, is really driven by industrial load growth that comes with significant jobs. Much of the discussion over the last couple of quarters has been around data centers, AI growth that's some of the toughest electric load growth to serve, right.

Low margin, doesn't necessarily come with the jobs. And so does put to your point, sort of pressure more largely on cost allocation. I think here again, where I think it's a clear differentiator for CenterPoint, we serve load that is not only growing from a residential standpoint and industrial standpoint, but keeps that cost allocation issue sort of less impactful than maybe some of the peers that have data center growth really driving their electric sales.

Hey, good morning.

Yeah, maybe a couple of quick points on that, Jim. So the $2.2 billion, the low end of the range, is consistent with our $44.5 billion, the upper end of the resiliency filing that incremental $500 million would put us to $45 billion overall through 2030. Look, I think that there is pretty strong alignment across the state here in Texas around investments to keep the grid resilient and can help the economic growth that we experienced in Texas. I also think what's important part of this filing and what is maybe different than some of the historical resiliency spend is as part of the filing, we have to prove the benefits of the incremental resiliency mitigation measures exceed the cost.

So, part of this filing really demonstrates that on a net basis, this is still in the customer's best interest for us to make these investments. And so, you know, I feel like there's going to be strong support for our filing, the other filings of the transmission distribution utilities. That being said, to your point, if there is concern around the proposed mitigation measures that we have in our filing, as a quick reminder, this is about 15% of our total capex plan. And as I alluded to in my answer to Constantine, I think we have plenty of incremental capex opportunities outside of this, whether they be on the gas side of the business -- I talked to about local transmission pipeline there, potential to accelerate our next generation smart meter deployment.

And then on the electric side, I just cannot reiterate enough the opportunity with this exponential load growth driven by industrial electrification and electrification of commercial fleets. So, I think that there are an abundant set of opportunities of incremental capex and I don't know, if Chris, if you want to continue to reinforce thoughts on the financing plan.

Sure. And just to build on that again, as we look at the base plan that -- at the low end of the resiliency filing, that would just support the $44.5 billion with the ongoing very modest ATM program that we've got through 2030. And again, as we look beyond that for some of these incremental opportunities, it really would be funny in line with the existing cap structure.

Good morning Steve. Thanks for the question. We pushed the start of the hearings by day, as we continue to explore the potential here for settlement -- it's hard to handicap kind of expectations -- I think we're working hard with stakeholders to find what we believe would be a constructive path forward. As a quick reminder in this case, a lot of the capex that's included in the Indiana Electric filing has been in front of the IRGC and our stakeholders in previous forums, whether that's the cost of the coal transition or the transmission distribution investments that we are making to improve reliability and resiliency in that area. And so, a lot of the issues of the case have kind of been seen by stakeholders in a number of different forums. And so, we continue to try to work constructively towards a settlement and we'll update as we have more information.

Morning Steve, that's accurate, really, what S&P was looking at was the past right as they evaluated and arrived at that outcome, our general assumption is it is that roughly year long period. And as we look at the plan going forward, as we look over the next few years, you'll see naturally that Uri impact roll off and we'll see ourselves really as we see even just in 2024 looking at the year, you're going to see us at Moody's continuing to target that 100 basis points to 150 basis points cushion that won't change. And additionally, you're going to see us grow into a greater cushion at S&P as we walk into the subsequent years. So, comfortable with the base financial plan and what it informs for the years ahead.

I think Steve, if I could add to that, obviously, as Chris said, we're comfortable, but I think it's important just to highlight the core difference in methodology here because it is transitory in nature. The way the issue at hand is, we receive securitization proceeds from winter storm year with significant cash inflow. We have to pay taxes on that cash outflow, S&P's methodology excludes that significant inflow, but includes the associated cash outflow, right that's sort of a transitory effect and as Chris said, as we look forward, we feel comfortable about the trajectory that we're on and so just a very sort of idiosyncratic impact from their calculation.

Yeah, thanks Steve. What I would say is I don't think you can find a more dynamic setting anywhere in the country, particularly on electric sales growth than you can here. Residential load growth continues to be best in class right. We continue to see the industrial load growth that I mentioned, transportation electric load growth and I think that's really reflective in our sales numbers for the first quarter. On a quarter-over-quarter basis, when you adjust for weather, sales are up 8% over first quarter last year, driven by strong residential, commercial and large industrial growth. There's electrification at one of our nation's largest ports here in Houston -- we continue to see incremental growth in the petrochem complex.

We're becoming one of the dominant areas in the country for life sciences. And so what I would say is basically the growth that you see in any one sector, including data centers around the country, we see it in all those sectors here in the Greater Houston area. And so I see it showing up in the numbers this quarter, and I see it driving continued growth, at least through the remainder of the decade, if not well beyond.

Hi, Nick. Good morning. I think about it is, just to be clear, very small right. We're really talking about a component here where we're looking at the federal programs from a loan standpoint, as you mentioned, as well as the specificity that we provided around the GRIP program that's there, which has already been filed. We've also got some Texas Department of Energy -- emergency management funds that we've also asked for on the state level. Those would be in the form of grants.

Again, just a situation where we can get better outcomes in total for customers. But I don't know, Jason, if you want to give kind of color on high level how it informs the EPS guide.

Yeah. Thanks Chris. What we've consistently said Nick, is that we'll come back after these rate cases next year and provide new 10 -year plan well into the mid 2030s, kind of reflecting our continued confidence to long term growth. What I want to highlight, though, are, there's been a handful of things that we've been able to accomplish since we rolled out that guidance, that long term EPS guidance, which is again, 8% growth here in 2024 and then the mid to high end of the 6% to 8% range through 2030.

And what I would say is we certainly have more tailwinds than we have headwinds. From a tailwind standpoint. We had some success in the legislative session helping reduce some regulatory lag in key jurisdictions. As I mentioned previously, we've increased capex since we've issued that guidance by more than 10%. The third thing that I point to is last quarter when we announced the sale of Louisiana, Mississippi, and the recycling of that capital. That's moving what is nearly $800 million of rate base and $1 billion of capex into jurisdictions that earn a higher return.

And I'd be remiss to say that obviously interest rates are a little higher and we've announced a modest equity program. But suffice it to say the tailwinds here exceed the headwinds. And as we get to the other side of these rate cases, we'll be in a better position to give a long term comprehensive update to the earnings guidance for the company.

Sure thing Nick. And I'll just say as we're building a plan heading into 2023, I don't know that any of us really could have perfectly predicted the impact there but I think you saw the company execute well and overcome that pressure. As we looked into 2024 walking into the year, we definitely planned conservatively there, and it's hard for me to be too specific, but just know that as you look across our plan, I hope that you've seen we're consistently bringing forward conservatism so that there are no surprises in the end. I think it's the same thing on our capital programs right. As we folded in capex over time, we're making sure we're doing so conservatively as we see the opportunity to execute it, to finance it and recover it, so it really holds on the same side in terms of higher for longer, we walked in this year assuming this was going to be the case.

Thank you.

Good morning, Jeremy.

Yeah. Thanks for the comprehensive question. Look, from a wildfire standpoint, as you highlighted, $140 million isn't a significant driver of the overall $2.2 billion to $2.7 billion plan. I think it's important to understand why -- 60% of our system is currently underground Jeremy, as I know you know, we have high relative humidity here. So all things being equal, we have significantly lower wildfire risk than our peers. That being said, obviously we haven't sat on our hands. We've been addressing this risk with changes in operations, shutting off automatic reclosers, enhanced inspections during periods of higher wildfire risk. But this plan basically addresses about 1% of overhead miles that are in higher fire risk areas.

And so, this is probably under the current set of conditions sufficient to mitigate our wildfire risk. Now, obviously, we're going to continue to look at weather patterns, drought patterns, to see how that evolves over time. But I don't really see the wildfire mitigations being a significant long term driver of capex. Where I do see further opportunity beyond this plan is really on the distribution side. As I said in my prepared remarks, we have been really focused on hardening the backbone of our system, the electric transmission and the substation flood control efforts. We will largely be through those programs by the end of this first cycle. And so the real opportunities I mentioned is on the distribution side going forward and really creating a more resilient, reliable overhead electric system for our customers. So, more to come on that front -- we're happy to make this first filing and I see the opportunity for continued capex growth as we make subsequent filings in the future.

Operator, I think we have time for one more question, please.

Yes. Thanks Durgesh for the questions. On the first side, the timeline for approval of the resiliency plan I think the legislation called for about a six month approval period. What I will say is this is first of its kind legislation, so we'll have to kind of get in the middle of it. I'm sure there'll be a number of parties sort of intervening, but I would look towards that tail end of this year, calendar year, to get a final decision on the resiliency plan that we filed. On the question on regulatory lag, we've historically seen, particularly here in the Texas business, about 150 basis points on average regulatory lag and what I would say is we've sort of meaningfully reduced that amount.

But, it's an odd time to really be calculating kind of what regulatory lag is at the end of the first quarter, just because we're in the middle of our rate case filing and as a result, we don't have access to the full complement of capital recovery mechanisms that we will have sort of on the other side of this rate case. And so, just know that we've taken steps to begin to reduce that historical regulatory lag and I think we'll be in a place that gives a more normalized view of that on the other side of the rate case.

Yeah, thanks Durgesh.

Okay, operator with that, that concludes our call for the quarter. Thanks everyone for joining.